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Portfolio > Economy & Markets > Stocks

Fund in Focus: Brandywine Fund

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Bill D’Alonzo doesn’t want to own expensive stocks, but he’s not likely to be mistaken for a value-oriented investor.

D’Alonzo, the lead manager of the Brandywine Fund (BRWIX) for nearly 20 years, looks for companies whose bottom lines are increasing by 25%-30% per year or more.

“We’re dramatically, intensely focused on earnings,” he says. Moreover, he wants those profits to be the result of operations, not increased interest income or lower taxes. While he has no hard and fast rules about revenue growth, he prefers to see double-digit increases. Companies that he thinks will beat analysts’ estimates pique his interest, too.

As for share valuations, D’Alonzo says he prefers them to be “reasonable.” The stocks in the fund right now are selling at about 18 times projected 2004 earnings, he says.

Strong balance sheets are also on D’Alonzo’s list of desirable corporate characteristics, as are businesses that are gaining market share at a rate that will propel them to the top of their industry.

The team that oversees the fund can buy companies of any size, but its focus on rapid growth tends to push it into small and mid-sized ones, according to D’Alonzo.

The fund’s emphasis on growth hurt it in 2001 and 2002, when that style of investing was out of favor. The $3.9-billion Brandywine fund lost 20.6% and 21.7% those years. Compared to its peers, though, it didn’t fare badly. The average mid-cap growth fund declined 20.7% in 2001, and 26.2% the following year.

Over the long term, the fund has had strong returns. For the ten years ended in March, Brandywine has risen 10.3%, on average, versus 9% for its peers.

When investors warmed up to growing companies last year, Brandywine rebounded, posting a total return of 31.5%, although it lagged similar funds, which gained 35.8%. Through last month, however, Brandywine was ahead of its peers again, rising 4.4% while they gained 4%.

A recent addition to the fund is chip maker Fairchild Semiconductor Intl (FCS). D’Alonzo and his team began buying the company in late August because they saw it benefitting from increased demand for personal computers.

After posting losses in the first three quarters of 2003, Fairchild returned to profitability in the last three months of the year. D’Alonzo thinks its earnings could accelerate by 200% going forward.

The fund’s Fairchild shares cost $18.50 on average. The stock has been trading around $24 lately.

In December, the fund bought a stake in athletic footwear and apparel maker and retailer NIKE, Inc`B` (NKE). D’Alonzo said he was attracted to the company because its sales and order rates were picking up. The fund manager also expected Nike’s earnings, which had slipped over the last two years, to bounce back.

The fund’s Nike shares cost $66.73 on average. The stock has been trading for $77-$78 of late.

The fund’s No. 1 stock is medical device manufacturer Boston Scientific (BSX). D’Alonzo said he was drawn to the company because he envisioned that its new line of stents, which are used to prop open arteries, would enable it to grab market share. Boston Scientific has generated earnings growth of about 25% over the last two years, and D’Alonzo thinks that rate could jump to “well over” 100%.

Brandywine began buying shares of Boston Scientific in September at an average cost of $32.99. The stock has been trading between $42 and $45 this month.

Financial services companies currently account for 14% of the fund’s assets, including its second and third largest holdings: credit card lender MBNA Corp (KRB), and investment banker Goldman Sachs Group (GS).

D’Alonzo says MBNA’s president and chief executive, Charles Cawley, has been moving to freeze costs by halting new construction and hiring, and by capping compensation for executives. The moves should translate into increased revenues, but more importantly they will boost margins “dramatically,” D’Alonzo says.

D’Alonzo says he also likes Goldman Sachs because it has been cutting costs. He expects the firm’s earnings to increase by more than 30% this year.

Goldman Sachs and MBNA entered the portfolio in February this year. Goldman’s shares, which cost $107.15 on average, have been trading for $106-$107 recently. The fund paid an average of $27.97 for its MBNA shares. The stock has been trading for about $28 lately.

Because of the team’s high-octane investment approach, stocks tend to move in and out of the fund rapidly. D’Alonzo and his fellow managers sell companies whose financial fundamentals erode, or when they find what looks like a better investment. Rather than eliminate an investment gradually, they unload the entire position in a single transaction, D’Alonzo says. “We’re very aggressive,” he says. “If we like a name, we buy it. If we don’t like it, we sell it.”

That tends to push the fund’s turnover rate over 200%. Last year, it was was 279.3%, compared to 133.6% for similar funds. D’Alonzo said the fund turned its holdings over faster than usual in 2003 because the managers wanted to clear space in the portfolio for technology stocks, which looked attractive at the time.

The fund’ tech investments include two companies in the telecom sector: America Movil`L`ADS (AMX), which provides wireless telecommunications services in Latin America; and Andrew Corp (ANDW), a maker of telecommunications equipment.

Andrew Corp. saw its stock jump on April 6 after the company raised its first quarter earnings outlook. American Depositary Receipts of America Movil strengthened yesterday amid expectations that it will report robust first quarter profits.


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